Gerald M. Griffith, Jones Day

AHLA President, FY 2012

We have all heard the hype around sporting events—such and such game is the “game of the century” or a heavyweight boxing match is the “fight of the century.” In the august chamber of the Supreme Court in March 2012 we were witness—either in person for a lucky few or vicariously for the rest of us—to the Healthcare Case of the Century (or actually three consolidated cases). Via blogs, links to the audio and transcripts, summaries and webinars, AHLA has been on top of developments in the case as only AHLA can be. The AHLA staff and volunteers involved all deserve our thanks for keeping us apprised of these important developments—and there is surely more to come regardless of the outcome in the case.

To predict the outcome of the pending Supreme Court decision on the healthcare reform law would be foolhardy at best. Even predictions as to the final vote count on each of the argued issues vary widely. What may be easier to predict in broad strokes is the effect that each possible combination of answers will have on the healthcare sector. This month, I would like to run through what those effects might be under a variety of potential outcomes—without commenting on the likelihood of any of those outcomes. In general terms though, I think it is safe to say that whatever the outcome, the aftermath will alter the healthcare sector for years to come.

Day One—The Anti-Injunction Act

The Anti-Injunction Act in principle sounds simple enough—the rule is pay the tax first and litigate it later. We all learned in Constitutional Law that in many instances, appellate courts look for jurisdictional bases to avoid deciding the merits. The question here, however, is whether the penalty imposed by the healthcare reform law for failure to buy minimum coverage is itself a tax or whether it is subject to the same limitations on pursuing litigation before payment—and whether the act is in fact jurisdictional or whether it is a claim processing rule. The penalty is included in the Internal Revenue Code, and the law says the penalty is to be “assessed and collected in the same manner” as other penalties assessed under Section 5000A(g)(1) of the Internal Revenue Code. What complicates this question is that both parties now agreed that the Act does not apply, and there is precedent for the federal government waiving the provisions of the Act, albeit dated. Counsel to the federal government argued that the Act did not apply, and the penalty was not a tax, and distinguished its argument on the individual mandate by arguing that Congress can exercise its broad taxing power for more than levying taxes. As a result, the Court appointed counsel to amicus curiae to argue that the Act does apply.

If the Court finds that the Act applies in this case, then the earliest time at which a challenge could be mounted again in the courts would be when the affected individuals file tax returns in 2015. In the meantime, the healthcare sector and regulators likely would proceed full steam ahead in implementing the healthcare reform law. States that have resisted these changes may continue to do so at least until after the Presidential election when it should become clear whether there are enough votes for a legislative change to the law. Any such delay, however, would put the states at risk of falling far behind in implementation, potentially with negative financial and operational effects on providers operating within their borders.

On the other hand, if the Court rules that the Act does not apply—for example, because the penalty is not a tax or because the federal government has waived the protection of the Act—then some of the uncertainty around the law would be resolved now rather than in November or in 2015. How that affects the healthcare sector in turn depends on how each of the remaining issues is resolved.

Day Two—The Individual Mandate

Whether the individual mandate is upheld or struck down depends on the Court’s interpretation of two fundamental powers of Congress—the power to regulate commerce and the taxing power. In part, and in a wrinkle our Antitrust attorney colleagues may find interesting, it may come down to a definition of the relevant market. Is it healthcare, a subset of healthcare services or insurance? If Congress can regulate the transaction (in whichever the relevant market is) at the point of sale, is the mandate just a matter of timing? In other words, is it, as some of the Justices suggested, the only practical way to regulate the transaction because insurers would not sell coverage to someone when they show up in the emergency room seeking treatment? Is Congress, putting aside the public policy arguments in support of its decision, forcing people to enter into commerce or are they already in commerce or affecting commerce on the theory that everyone likely will need some healthcare services at some point in time? Can the penalty under Section 5000A(g)(1) of the Code be a proper exercise of the taxing power even if it is not a tax for purposes of the Anti-Injunction Act, or is it an impermissible direct tax? Does the failure to expressly rely on the taxing power mean that it is irrelevant now even if Congress could have relied on that power? All of these questions and more were bandied about in some fast-paced exchanges on the second day of oral argument.

If the individual mandate is upheld, barring an election sweep for the Republicans, the effects on the healthcare sector seem relatively clear. The law will be implemented in most if not all key respects to the point that it becomes as entrenched in the healthcare sector as Medicare and Medicaid. Whether it achieves the promise proponents believe it has to improve quality and access to care and control costs of healthcare coverage, however, only time will tell. If the mandate is upheld, however, it likely will have time on its side or at least enough time to assess whether the reforms overall are beneficial to the healthcare sector and the public.

On the other hand, if the mandate is found to be unconstitutional, there will be significant pressure on both major political parties to put forth an alternative plan—either to pay for the remaining provisions of the law or to replace the law with other reforms to address the same policy concerns of lack of insurance for many Americans and the escalating costs of healthcare. Although this may take the form of a legislative compromise, it also may become instead a central issue again in the Presidential election this year. For the healthcare sector, this could mean retooling many of the processes already developed or in progress to address the elements of the new healthcare reform law. Doing nothing does not seem to be a viable option in the current climate; however, depending on the reasons for the Court’s decision, we could end up with a replacement plan that is more of a combination of federal and state initiatives, whichever party prevails at the polls.

Day Three—Severability

The marathon third day of oral argument began with a spirited debate of the severability question. This will be an issue, of course, only if the Court strikes down the individual mandate. Severability has both legal and practical implications. One threshold question that many of the Justices seemed to be struggling with was how to draw the line as to what parts of the law should rise or fall with the individual mandate. On the one hand, if the young and healthy do not purchase insurance, premiums would be higher for those who do purchase insurance and if there are more uninsured, hospitals in particular would be under increasing pressure to provide free or discounted care. Certain provisions regulating healthcare coverage, such as guaranteed issue, would prove more costly to implement. On the other hand, many aspects of the healthcare reform law arguably have a lesser degree of connection to the mandate, such as the renewal of expiring programs, modification of fraud and abuse laws, or increased transparency in the community benefit activities of nonprofit hospitals. Could the law have been passed without those provisions or, stated differently, without the individual mandate would the law have been passed at all? What relevance should be placed in the lack of direction by Congress on severability in the law itself? Should the Court assume that Congress would want as much of the legislation as possible to remain in effect and that what’s left can be fixed by Congress, or should it give Congress a clean slate to operate from?

Those are just some of the questions teed up on oral argument. If the individual mandate and perhaps some other provisions are severed, then the regulators will face a key decision point over whether to insist on implementation of the remaining programs. Some features of the law though, if left undisturbed, are arguably self-implementing, such as many of the fraud and abuse changes and at least some of the provisions requiring enhanced community benefit processes and disclosures for nonprofit hospitals. For other programs, such as the Medicare Shared Savings Program, the answer may be less clear.

If the Court concludes that the mandate is not severable, e.g., because it is too central to the overall purpose of the legislation and inextricably tied to other major components of the law, then the healthcare sector may see at least a few months of inactivity while the political process plays out. There will be pressure, however, for each party to develop a replacement plan as noted above.

Day Three—Medicaid

At first blush, one might say that the Medicaid expansion is found money for the states. Few if any states have what could be consider flush Medicaid programs. As evidenced by the community benefit discussions in the tax area in recent years, we have all heard about cost shortfalls in providing care to Medicaid beneficiaries—though some payment is clearly better than none. For some states, however, there has been concern that the expansion is not funded indefinitely by the federal government, and that states will be obligated to continue the expanded benefits beyond the period of full federal funding. Failure to implement the expansion, according to those reluctant states, also could result in loss of all Medicaid funding. Whether or not such a cut off has to be a reasonable action to be upheld was itself an issue debated during oral argument, as was the main question of whether the provisions designed to encourage (or as the challengers would say, force) states to expand Medicaid were impermissibly coercive.

One advocate (Mr. Clement), responding to a question from the bench, commented that whether or not to accept a $10 million job offer depends on where the money comes from. That is perhaps an age-old question for federally funded programs in general. Should the Court uphold the provisions for expanding Medicaid, the reluctant states may be faced with a classic Hobson’s Choice—agree to expanded benefits that they may not be able to afford on their own or risk losing substantial federal support for their Medicaid programs. Of course, the Administration argues that this choice of accepting more funds to expand coverage has defined the history of the Medicaid program. The immediate result may be some rather rushed negotiations to try to obtain some assurances as to future funding plans. If the Medicaid expansion is invalidated by the Court, then the “found money” would be lost and the Hobson’s Choice would evaporate. Cost pressures on the state Medicaid programs, however, would continue and providers already struggling to cover cost shortfalls from a substantial Medicaid patient load may face increased financial struggles.

The Road Ahead …

The road ahead for the healthcare sector post-decision in the Healthcare Case of the Century may have many twists, but one thing you can count on is for AHLA to be there at every sign post to point you along the way. We will cover the constitutional ins and outs of the actual decision and its implications for the healthcare sector at our Annual Meeting in Chicago, June 25-27. This is one not to miss folks. See you in Chicago!